How to Manage Your Debt
Debt is difficult to avoid, especially if you own a house or condo. You need to make sure it stays under control and does not pose a risk to your financial security. You could say that some debts are better than others, like a mortgage, because they help build your assets.
However, there are other debts that should be avoided, such as an unpaid balance on a credit card. Here are a few tips for tackling your debts.
Use your credit card wisely
What you pay with a credit card is interest-free when you repay the balance in full at the end of the billing period. If you do not repay it in full, you end up with an unpaid balance. The average interest rate is 19%. It adds up fast!
Let's look at an example: you pay $3000 for your family vacations using your credit card on 15 May. The billing period ends on 1 June. You then have a grace period until 21 June to repay the $3000 without interest being added. If you repay half during that period, you will still pay interest on the entire amount, that is, $3000, from the moment you purchased your vacations (on 15 May). For example, if you repay your card in 3 months by making 3 equal payments, you will pay about $95 in interest, if we do the math with a 19% interest rate.
You should also avoid paying only the minimum every month. If you do, repaying your debt will take a long time, and you will pay a lot of interest. To go back to the example of your $3000 vacation paid for with your credit card, if you only pay the minimum of 5% per month, it will take 8 years to repay your debt. In the end, you will have paid about $1327 in interest on a vacation that originally cost $3000! Now you know why this is the kind of debt you do not want to accrue.
The Autorité des marchés financiers offers a calculator that allows you to assess various repayment scenarios:
Calculator to pay off a credit card 
.
Repay the debt with the highest interest rate
If you have several debts to repay, start with the one with the highest interest rate. You will save on interest. Therefore, if you have a balance to repay on a credit card, do so before creating your emergency fund. Since the interest rate is high, that is your priority.
Use a tax refund to pay off a debt
If you receive a tax refund or unexpected income, such as an end-of-year bonus, use it to pay off a debt with a high interest rate.
Take out a home equity or personal line of credit
If you own a house or a condo, can you group your debts on a
home equity line of credit with a lower rate? We talk about it on the
3 tips to manage your mortgage properly web page.
If you do not own a property, you could take out a
personal line of credit for your debts. The interest rate is usually variable, which means it can increase or decrease. But it is generally lower than a credit card or personal loan, and you pay interest only on the amount you use.
Ideally, you negotiate a line of credit when your financial situation is in good shape. Be careful: discipline is important with this type of line of credit to avoid increasing your debt by adding expenses all the time.
Repay your other debt before your student debt
If you have a student debt, it is often preferable to repay it after your other debt because the interest may entitle you to a federal or provincial tax credit. This means that the amount of your income tax can be reduced by the interest you pay on your debt.
Build your credit report
A credit report is a collection of information managed by credit bureaus. Your file follows you and determines your credit score. Your credit score is used to determine what you can borrow and how much. It is a bit like your financial reputation. It is determined by the way you manage your debts, such as your credit cards.
A score usually varies between 300 and 900. The higher it is, the better your credit report is. Lenders look at your credit score to know if they can trust you by lending you money.
There are two main credit bureaus in Canada: TransUnion and Equifax. They determine your score and track it.
It is a good idea to check your credit report at least once a year to see if there are any errors or if someone applied for credit without your knowledge. You can do so by contacting your financial institution. Certain institutions offer it online. Otherwise, you can go on
Equifax and
TransUnion 's websites.
In addition, you can lock your credit report free of charge on Equifax and TransUnion's websites. This means that if someone wants to apply for credit in your name, the application will be rejected. To apply for a loan, you must authorize the verification of your credit report.
Who can help you manage your debts?
- You can consult an advisor at your caisse or bank.
- You can also use the
coopérative d'économie familiale (ACEF) services in your area (French only) that are often free.
- If your situation seems to be out of control, you can ask a syndic to help you. A syndic is an impartial (neutral) professional who is responsible for advising you in your best interest.